In the U.S., patent litigation settlement agreements have usually been discoverable, but inadmissible to establish a reasonable royalty because royalties paid to avoid litigation have generally been viewed as an unreliable indicator of a reasonable royalty.[i] Likewise, as litigation-related licenses have generally been viewed as inadmissible, settlement negotiations have largely not been discoverable, as they would be unlikely to lead to the discovery of admissible evidence or were shielded based on a settlement negotiations privilege recognized in several jurisdictions. The 2010 decision of the U.S. Court of Appeals for the Federal Circuit in ResQNet.com, Inc. v. Lansa, Inc.(ResQNet), however, has caused litigants and courts to reconsider these previously well-settled principals.
Specifically, the Federal Circuit stated in ResQNet that in determining a reasonable royalty award "the most reliable license in this record arose out of litigation." As a direct result, litigants in patent infringement suits have increased their efforts to discover settlement negotiations and to have them and the corresponding settlement agreements admitted as evidence in determining a reasonable royalty. In turn, courts have been required to examine more closely the grounds for treating such negotiations as inviolable and such agreements as inadmissible.
The ResQNet decision did not specifically overrule prior case law but expressed a view that litigation-related royalties may be relevant and even persuasive evidence in determining a reasonable royalty. The court, however, did not hold that litigation-related licenses were always the most reliable or the most comparable licenses for determining a reasonable royalty.[ii]
U.S. district courts are now grappling with the legal effect of ResQNet. For example, different judges within the Eastern District of Texas have taken contrary views on the effect of ResQNet. The Honorable Ward explained that "[t]his Court has in the past ... adopted a bright-line rule that settlement negotiations are privileged while the resulting license agreement is discoverable," but ResQNet "causes the Court to shift its approach toward the discoverability of settlement negotiations" and the "privilege does not apply."[iii] Likewise, The Honorable Folsom held that prior litigation-related licenses are admissible evidence and commented that "concerns about the reliability of litigation-related licenses are better directed to weight, not admissibility."[iv] However, The Honorable Love interpreted ResQNet differently and stated that it does not alter the settlement negotiations privilege and long-standing principles that settlements have little relevance to the patent damages analysis and that any relevance does not out weigh the risk of unfair prejudice and confusion.[v] In recognizing the prior views of The Honorable Ward and The Honorable Love, The Honorable Davis explained that "the admissibility of litigation licenses – like all evidence – must be assessed on a case-by-case basis, balancing the potential for unfair prejudice and jury confusion against the potential to be a reliable license."[vi] Accordingly, "[w]hether the settlement agreements are admissible will likely depend on whether they are an accurate reflection of the inventions' value," and "settlement communications are likely to be key" to such determination.[vii]
The effect of ResQNet remains to be seen, but patent litigants should be mindful of the potential significance of patent licenses resulting from prior litigation in determining a reasonable royalty award. In addition, patent owners and licensees should be mindful that license agreements they enter into could be used by or against them in determining a reasonable royalty in future litigations and that they themselves could become involved in discovery relating to the license agreement.
The following outlines the general principles applicable to the discovery and admissibility of settlement agreements and negotiations in patent cases, subject to applicable Federal Rules of Evidence and Federal Rules of Civil Procedure.
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In consideration of ResQNet, the following outlines some practical points to consider when drafting settlement agreements in patent matters.
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